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Unformatted text preview: Chapter 7 Activity-Based Costing and Management LEARNING OBJECTIVES Chapter 7 addresses the following questions: Q1 How is activity-based costing (ABC) different from traditional costing? Q2 What are activities, and how are they identified? Q3 What process is used to assign costs in an ABC system? Q4 How are cost drivers selected for activities? Q5 What is activity-based management (ABM)? Q6 What are the benefits, costs, and limitations of ABC and ABM? These learning questions (Q1 through Q6) are cross-referenced in the textbook to individual exercises and problems. COMPLEXITY SYMBOLS The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems. Questions Having a Single Correct Answer: No Symbol This question requires students to recall or apply knowledge as shown in the textbook. e This question requires students to extend knowledge beyond the applications shown in the textbook. Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10): Step 1 skills (Identifying) Step 2 skills (Exploring) Step 3 skills (Prioritizing) Step 4 skills (Envisioning) 7-2 Cost Management QUESTIONS 7.1 If direct labor hours are used for tending machines and equipment, small batches take fewer direct labor hours and so are allocated less overhead. However, if overhead costs increase more with setup time than with direct labor costs, the cost to set up for a large batch is likely similar to the cost of setting up a small batch. The cost per unit is then probably much lower for the large batch than for the small batch. 7.2 Organization-sustaining activities are activities related to the overall organization and unaffected by customers served or by quantities of products, batches, or units. Facility- sustaining activities are activities related to the overall operations of a production facility and unaffected by customers served or by quantities of products, batches, or units. Customer-sustaining activities are customer service activities that are independent of sales volumes and mix. Product-sustaining activities occur to support a product line or a single product if it is not part of a product line. Batch-level activities increase as the number of batches increase. These activities include setup and monitoring batches of product. Unit-level activities increase proportionately with production volumes or sales volumes. 7.3 Because ABC uses more cost pools and more cost drivers to reflect cause and effect relationships, ABC costs usually map the relation between cost and use of resources more accurately. Hence ABC costs reflect different proportions of the resource costs than do traditional costs....
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This note was uploaded on 02/28/2010 for the course SOM aim taught by Professor Are during the Spring '10 term at Texas El Paso.
- Spring '10